Issue of the week: Does Wall Street need speed limits?

last updated 8 January 2015

Wall Street’s addiction to speed is undermining the market, said Roger Lowenstein in The New York Times. High-frequency trading now accounts for as much as 70 percent of market volume, driven by firms that trade thousands of times per second in order to profit from tiny price discrepancies. The complex computer algorithms behind these trades cause “market blowups” like the 2010 “flash crash” and wild swings in companies’ shares that “no mere mortal could understand.” Under our noses, the market that exists in order to ideally allocate capital has instead become a gambling den for high-speed traders. They’re “putting everyone else at risk,” said USA Today in an editorial. Canada, Australia, and Germany are already exploring ways of reining in the practice, but in the U.S. the “regulatory response has been negligible.” Washington needs to recognize that the only thing high-speed trading brings to the market is “gobs of needless danger.”

Don’t overlook the positives, said Jim Overdahl, also in USA Today. High-speed trading has lowered trading costs, improved market liquidity, and made share prices more accurate, and everyone “who relies upon markets, including long-term investors, benefits from these improvements.” Unless regulators can prove they’ll preserve these important advances, they shouldn’t break what doesn’t need fixing. Unfortunately, that’s exactly what appears to be happening, said Simone Foxman in TheAtlantic.com. Last week, the European Parliament voted to put a half-second delay on high-speed trades, an “arbitrary speed limit” that neither creates more market stability nor changes traders’ profit motive. This “knee-jerk reaction” just shows that while technology speeds ahead, “regulators are way behind the pack.”

That may be, but even the industry says it’s desperate for rules, said Jenny Strasburg in The Wall Street Journal. High-speed trading firms watched in horror in August when one of their own, Knight Capital, lost $440 million in a matter of hours because of out-of-control software. Fearing the same could happen to them, they’re beginning to discuss “kill switches,” which could shut off trading at the first sign of trouble, and other reforms. It’s a good start, said Bloomberg.com, even if they’re thinking more about self-preservation than market stability. There is no doubt that “high-frequency trading is here to stay,” and that it “has the power to add real value” to our financial system. But we need strict rules to ensure that “human beings, not machines, are in charge of the markets.”